OPEC anticipates there will be less demand for its oil worldwide than it once believed; however, uncertainty remains on the direction of non-OPEC supplies as producers, including in the U.S., spend less and operate fewer rigs but benefit from lower production costs and increased hedging.

In its monthly oil market report, released March 14, OPEC pointed out that some non-OPEC producers are opting to “produce with losses rather than stopping production.” This comes as some OPEC members, including leading producer Saudi Arabia, continues a push to freeze production amid the global hydrocarbon oversupply that has outplaced demand, sending commodity prices and profits down.

In 2016, demand for OPEC crude is expected to be about 31.5 million barrels a day (MMbbl/d), which is about 100,000 bbl/d less than it forecast in February but 1.8 MMbbl/d more than in 2015.

“Within the quarters, the first quarter was revised down by 0.5 mb/d (500,000 bbl/d) reflecting the combined upward revision in non-OPEC supply and slight downward revision in demand,” OPEC said in the report.

OPEC noted that despite lower oil prices, non-OPEC supply in first-quarter 2016 was higher than expected by 44,000 bbl/d to average 56.98 MMbbl/d. “A strong contraction” is expected in the 2016 non-OPEC supply as continued low commodity prices translate into more spending cuts and major project deferrals.

However, “there has been a reduction in production costs, mainly in the U.S., as well as increased hedging, with producers choosing to produce with losses rather than stopping production,” OPEC said. “This has caused the non-OPEC supply forecast in 2016 to become more uncertain.”

The organization also revised its crude oil demand up for second-quarter 2016 by 100,000 MMbbl/d to 1.8 MMbbl/d.

But the forecast for the second half of the year remain the same—each quarter up by at least 2 MMbbl/d.

OPEC crude oil production in February averaged 32.38 MMbbl/d, down about 175,000 from January, OPEC said citing secondary sources. Production increased in Iran, Saudi Arabia and Kuwait, while Iraq, Nigeria and the UAE had production drops.

Iran has been ramping up oil production after world powers agreed to lift sanctions against the country earlier this year. It produced more than 3.1 MMbbl/d in February, up from about 2.9 MMbbl/d in January; while Saudi Arabia produced about 10.14 MMbbl/d, up from about 10.1 MMbbl/d.

The world’s supply-demand imbalance remains present, and excess supply in 2016 would creep up slightly if OPEC keeps pumping at February levels. Reuters reported that the excess supply could increase by 40,000 bbl/d to 760,000 bbl/d in 2016.

As of March 14, no consensus had been reached on whether OPEC would freeze oil output levels. Saudi Arabia and Russia, a non-OPEC producer, have already agreed to freeze production if other major producers do the same. Iran Oil minister Bijan Zanganeh said the country would join such discussions after its production hit 4 MMbbl/d, according to various news reports.

Global oil demand growth for 2016 also remains unchanged—up about 1.25 MMbbl/d to average 94.23 MMbbl/d, OPEC said in the report. Demand is expected to grow in China and India, among other countries; however, Brazil and Russia could see another year of recession.

“Despite the ongoing challenges, the global economy is expected to improve in the current year, especially in countries where GDP is more oil intensive, such as in major emerging economies,” OPEC said. “Given the current price trend, oil demand is likely to grow this year, broadly in line with the average of the last three years. Provided some of the existing upside potentials materialize, improving global economic growth can lead to higher oil demand later this year.”

Velda Addison can be reached at vaddison@hartenergy.com.